The passage of a bill that would permit in-plan
Roth conversions and allow partial annuitization of annuity contracts could prove to be a boon for financial advisers.
Both initiatives are part of HR 5297, The Small Business Jobs and Credit Act of 2010. The Senate passed the bill yesterday in a 61-38 vote. Now, the measure goes back to the House
The Roth 401(k) provision allows 401(k) plans to handle
Roth conversions without having to move the assets outside of the plan. Instead, the money would be rolled over into a designated Roth account that's held under the plan. This year, the conversions can be performed with a deferral on taxes until 2011 and 2012.
For the time being, only new money can go into a Roth 401(k). To perform a conversion, money has to be pulled out of a plan and placed in an individual retirement account.
“My sense is that anything that increases the ability of the participant to plan effectively for their retirement, and do it in as simple a way as possible, is a positive,” said Edward M. Lynch Jr., managing director with Dietz & Lynch Capital. “Whether the Roth conversion is appropriate is highly individualized.”
Nevertheless, it means that funds may be kept in the plan, which could be good news for advisers. Advisers working with plan sponsors have observed that adding the Roth account will probably raise administrative costs, so small-business-plan sponsors will have to figure out whether the benefit of having tax-free withdrawals from a Roth are worth the increased cost. That could mean more sessions with advisers.
Mr. Lynch said if the bill is passed and becomes a law, he'll be discussing it during first-quarter reviews with the firm's plan-sponsor clients.
On the retail side, partial annuitization of annuity contracts has also been approved by the Senate. Right now, clients who want to partially annuitize a contract need to swap their current annuity for two other contracts, then annuitize one.
The provision in the bill would skip a step, permitting clients to annuitize a portion of the contract, as they choose. If an annuity holder gets any annuity payments for at least 10 years, then that portion will be treated as a separate contract. The investment in the contract will be allocated pro rata between the portions that will be annuitized and the part that won't be annuitized.
“Partial annuitization is a good idea in a vacuum,” said Robert K. Haley, president of Advanced Wealth Management. He cited two situations in which it would work: “Where you have so much money that this strategy gives you a different diversification, and if you don't have much money but you're scared of having to make investment decisions now,” Mr. Haley explained.
He did not think it would affect his practice much, but he noted that insurers were likely going to win from the provision.
“Cynically speaking, it's an attempt by insurers to protect their own business,” Mr. Haley added. “If I want to annuitize some and not the rest, I take some money to insurance companies A and B. Now insurance company A gets to keep the money through a partial annuitization.”
